The US Dollar Index, and thus the popular ETF UUP (NYSE: UUP [1]), are challenging a key 'line in the sand' which could determine whether we get a 'support bounce' here... or the more ominous rounded reversal and potential head and shoulders pattern plays out to the downside.
Let's look at this level and why it is important.
First, the Daily chart of UUP shows our confluence support zone:
[2]
The key level to watch - as the dividing line between a bullish swing back up... or a bearish breakdown to lower levels - is $23.40.
Why?
It's the 50 day EMA which currently aligns with the 38.2% Fibonacci Retracement as shown from the January 2009 low of $22.60 to the recent high at $23.90.
Price also formed a classic negative momentum divergence into these levels, so a pullback was expected. Pullback yes, but how far will it retrace? That's why we need to watch this level very closely.
Should the dollar index weaken here, we could see the Head and Shoulders Pattern - or Rounded Reversal pattern (both bearish) - resolve to get its downside target of $23.00 (a rough estimate of the Head and Shoulders, which also happens to be near the 61.8% retracement as shown).
If that doesn't happen, then the dollar will strengthen off this confluence support area to make a potential run for the highs (which would be bearish for gold and oil and perhaps stocks as well).
Let's zoom the perspective in to the 120 minute chart to focus on the pattern and the Fibonacci Level to watch.
[3]
This time I've stripped off all the indicators so as to focus squarely on price, including the prior swing high from late January also at $23.40.
You can also visualize the "Rounded Reversal" pattern and potential Head and Shoulders pattern forming with price alone.
Speaking of that pattern, let's see the 'arc' and Fibonacci levels on the actual Dollar Index ($DXY):
[4]
The structure is the same, only I've drawn the 'arc' that comprises the "Rounded Reversal" pattern.
The level to watch on the Dollar Index is $79.50.
With today being a Fed Day, all eyes will be on the announcement (specifically on the text and guidance) and how that ripples through the markets.
Remember, a stronger dollar is bearish for commodities such as oil and gold and generally stocks, while a weaker dollar is bullish for gold and oil as well as the stock market.
Keep track of these Inter-market Relationships and opportunities with our Weekly Inter-market Report membership service (http://premium.afraidtotrade.com/ [5])
Corey Rosenbloom, CMT